Monday, July 9, 2012

Linked here is a detailed quantitative analysis of AFLAC Incorporated (AFL). Below are some highlights from the above linked analysis:

Company Description: Aflac Incorporated provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage.Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

AFL is trading at a discount to 3.) and 4.) above. The stock is trading at a 19.9% discount to its calculated fair value of $53.18. AFL earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

AFL earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. AFL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 30 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

AFL earned a Star in this section for its NPV MMA Diff. of the $1,055. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as AFL has. If AFL grows its dividend at 7.3% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. AFL earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.

Memberships and Peers: AFL is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: American Independence Corp. (AMIC) with a 0.0% yield, Unum Group (UNM) with a 2.2% yield and CNO Financial Group, Inc. (CNO) with a 1.1% yield.

Conclusion: AFL earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks AFL as a 5-Star Very Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $55.28 before AFL's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 30 years of consecutive dividend increases. At that price the stock would yield 2.4%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.7%. This dividend growth rate is lower than the 7.3% used in this analysis, thus providing a significant margin of safety. AFL has a risk rating of 1.25 which classifies it as a Low risk stock.

Operating in the two largest insurance markets in the world (U.S. and Japan), AFL has built a tremendous low-cost distribution system. Focusing on supplemental insurance products, AFL consistently generate excess returns for shareholders.

Concerns about AFLs investment portfolio, which holds European bank hybrid bonds and European sovereign debt, have eased as the company has taken steps to de-risk its investment portfolio. This move will likely slow earnings growth over the next few years, but should lead to higher long-term value.

AFL is currently trading at a discount versus its historical valuation. As a result, its forward yield is in excess of 3%, which is well above its long-term average. AFL is trading below my fair value price of $53.18. At these levels, I will continue to add to my position as its valuation and my allocation allows.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in AFL (2.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.